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The Necessity of Gangster Capitalism

Primitive Accumulation in Russia and China

Nancy Holmstrom is professor of Philosophy at Rutgers Universityin Newark, specializing in social philosophy, particularly marxist and feminist theory. She is co-editor of Not for Sale: In Defense of Public Goods (Westview Press, 2000). Richard Smith has taught history at Rutgers University in New Brunswick, and has written on the social and environmental impact of the transition to capitalism in China for the New Left Review, the Ecologist, and other publications.

The Russian bank laundering scandal in the newspapers last fall is only the latest installment in the ongoing saga of corruption coming out of the former Soviet Union. The more important question is: where did they get the money in the first place? How, for example, did the former Premier of the Ukraine manage to buy a seven million dollar mansion in Marin County, California, on his official salary of a few thousand dollars a year? The answer is only too apparent: Moscow’s gangster rule has become so well known that the term “Mafia” has lost its exclusively Italian connotation. China is not much better. Ten years after the Tiananmen Square demonstrations were called to protest official corruption, corruption is still the “Number 1 Complaint” of Chinese today, according to a recent headline in the New York Times. Western economic experts, who were the architects of the former communist countries’ transition to market economies, have expressed shock and disappointment at the extent of corruption, criminality, and social collapse that have accompanied the market reforms they prescribed. As one U.S. Treasury official complained, “We had a belief that the first generation of Russian capitalists would be nice guys, but they are ruthless motherfuckers.”

We will argue here that the reason Western economists were surprised by these outcomes is because they relied on a historical-fantasy-world, neoliberal model of capitalism. The emergence of gangster capitalism and wholesale corruption in the former Soviet bloc and China should have been entirely predictable to anyone familiar with the historical origins of capitalism in Europe, the United States, and elsewhere, and to anyone with a passing familiarity with Marx’s account of “primitive accumulation.” After a brief review of Marx on the origins of capitalism, we will consider the theory’s current usefulness as an aid to understanding what is happening in Russia and China today.

Towards the end of volume one of Capital, in a chapter called “The Secret of Primitive Accumulation,” Marx raises the question of how the process of capitalist accumulation got started in the first place. Though markets existed from antiquity, capitalism as a social productive system did not really emerge until the sixteenth and seventeenth centuries, first in England. This system which, unlike all previous historical modes of production, was based on generalized production for market, and depended on the predominance of two kinds of commodity producers/sellers: on the one hand, a class of capitalists vested with a virtual monopoly of the ownership of the means of production and, on the other hand, a propertyless proletariat dispossessed of the means of production and subsistence and, consequently, with nothing to sell but their capacity to labor. The emergence of these two great social classes was the indispensable condition for the operation and development of capitalist production. “Capital,” Marx was keen to emphasize, is not just money; it is this unique social relationship. So if one wants to understand the origins of capitalism, one has to understand how these these two great classes came onto the historical stage in the first place. Mainstream economists of Marx’s day relied upon a “Just So” story of how the diligent, intelligent, and frugal people accumulated wealth, while the other, lazy rascals, lost theirs. Dismissing this myth as “insipid childishness” in defense of (stolen) property, Marx argued that primitive accumulation is nothing but the “historical process of divorcing the producer from the means of production.” In early Europe, the producers had to be freed from feudal bonds, but they also had to be “freed “ from possession of any means of subsistence—access to land and any feudal guarantees of survival. In England, the first capitalist nation, an alliance of landlords, nascent capitalist farmers, and the state waged a centuries-long campaign to privatize farms and commons traditionally held by peasant collectivities. England’s peasants were forcibly evicted from their farms by a series of enclosure movements from the fifteenth century through the nineteenth century, and thereby came to be wholly dependent on the market for the satisfaction of their needs. By seizing these lands and thus securing a virtual monopoly of the agrarian means of production, England’s nascent agrarian bourgeoisie established the conditions for the normal operation of capitalist production, i.e., for the systematic exploitation of wage labor. This institution was greatly facilitated by the English state, which enacted harsh vagrancy laws (the “bloody legislation against the expropriated”) to compel the newly propertyless proletariat to take up wage labor or be forced to labor in workhouses. Marx sums up this process of primitive accumulation by noting that: “In actual history it is notorious that conquest, enslavement, robbery, murder, briefly force, play the great part.”

Today, we are witnessing a similar process throughout the post-Communist world carried out under the banner of “market reform.” Indeed, this modern version of primitive accumulation in Russia, Eastern Europe, and China amounts to the greatest enclosure movement in history—virtually a continent-wide drive to privatize state-collective property, far surpassing in scope the historic enclosure movements. And, as in the past, this process is hothousing the emergence of a class of newly rich capitalists, side-by-side with growing millions of unemployed and starving. No one can forsee the end result of this struggle to create the social property foundations of capitalism, but what is certain is that economic depression, social polarization, corruption, and class struggle are going to increase. Today, as yesterday, the process of primitive accumulation is not a pretty one.

Russia’s descent into gangster capitalism began in the early 1990s when Russian market reformers attempted to introduce capitalism in one fell swoop—on the advice of Western advisors, particularly Harvard University “shock therapist,” Professor Jeffrey Sachs and his capitalist provocateurs at the Harvard Institute for International Development (HIID). In 1990 and 1991, as Gorbachev’s reform program stalled and his government was collapsing, Sachs and his Institute colleagues advised Yegor Gaidar, Yeltsin’s first economic czar, to dismantle quickly most of the controls and subsidies that had structured life for Soviet citizens for most of the century. Sachs predicted a more or less smooth transition to a normal western-style capitalism, once the initial shock of price decontrol was over. In the early nineties, Dr. Sachs bragged about how his prescriptive shock therapy had cured Bolivia’s hyperinflation in nine days. Eastern Europe’s and Russia’s reform, he allowed, might take longer. Sachs could think this because, like most mainstream economists, he has a completely ahistorical understanding of economics. Like Adam Smith, Sachs believes that the “propensity to truck and barter” is built into human nature. So he supposed the transition to capitalism would be a natural, virtually automatic economic process: start by abandoning state planning, free up prices, promote private competition with state-owned industry, and sell off state industry as fast as possible—and economic growth and prosperity would follow. As he wrote in 1990:

All this [shock therapy] will reduce real wages sharply in 1990, by 20% or so relative to 1989. That is a brave step. But this decline will not mean an equivalent decline in actual living standards. These will in fact fall much less sharply, bolstered by the end of shortages and the end of the ‘inflation tax’ now eating away at households’ cash balances, genuine gains not reflected in the real wage indexes.1

The crucial thing, Sachs stressed, was not to waste time on half measures or hopeless “third ways” such as a “chimerical market socialism” but to force the transition to a western-style market economy as fast as possible. So Gaidar and his successor, Anatoly Chubais, wasted no time and went “all the way.” Russia got the shock: On January 2, 1992, price controls were lifted on 90 percent of traded goods, and by the end of 1994, three-quarters of Russia’s medium-sized and large-scale industrial enterprises had been privatized—“sold” off (stolen, would be a more accurate description) to management, underworld gangsters and the like—and the private sector produced 62 percent of Russia’s officially reported gross domestic product (GDP).

The Demodernization of Russia

The result was an unmitigated disaster. In the first year of reform, industrial output collapsed by 26 percent. Between 1992 and 1995, Russia’s GDP fell 42 percent and industrial production fell 46 percent—far worse than the contraction of the U.S. economy during the Great Depression. Worse, pace Dr. Sachs, it has yet to recover. Since 1989, the Russian economy has halved in size, and continues to drop. Real incomes have plummeted 40 percent since 1991; 80 percent of Russians now have no savings. The Russian government, bankrupted by the collapse of economic activity, stopped paying the salaries of millions of employees and dependents. Unemployment soared, particularly among women. By the mid to late nineties, more than forty-four million of Russia’s 148 million people were living in poverty (defined as living on less than thirty-two dollars per month); three quarters of the population live on less than one hundred dollars per month. Suicides doubled and deaths from alcohol abuse tripled in the mid-nineties. Infant mortality reached third-world levels while the birthrate plummeted. After five years of reform, life expectancy fell by two years (to seventy-two) for women and by four years (to fifty-eight) for men—lower than a century ago for the latter. Currently, deaths so greatly exceed births that the Russian population is falling by about one million per year. If these trends continue, in the next thirty years Russia’s population is expected to fall from 147 million to 123 million—a demographic collapse not seen since the Second World War.2

“Economic reform” has also brought the mass abandonment of children. By the end of 1998, at least two million Russian children were orphaned—more than at the end of the Second World War—and only about 650,000 live in orphanages. The rest were homeless. A year after leaving orphanages, one in three becomes an alcoholic, one in ten commits suicide. In what was once the second industrial power in the world—where schools turned out far more scientists and engineers per year than the United States—ten million children currently do not attend school.

This human catastrophe, which mainstream economists call “bumps on the road to a market economy” is more accurately summed up by Professor Stephen Cohen of New York University as the “endless collapse of everything essential to a decent existence.” It is also the process of creation of a true Russian proletariat. Under communism, Russian workers certainly did not own the means of production, but they did, and many still do, in a real sense “own” their jobs. They had long-established rights to housing, state-provided medical care, childcare, and numerous subsidies from the state. These social property rights are being destroyed in the process of transition to a “normal” market economy. Divested, “freed” from control, possession, or ownership of means of production, the majority of people of the former Soviet Union are forced to come to the market with, in Marx’s words, “nothing to sell but their skins.” Though probably more than they bargained for, the architects of the transition insist that a certain degree of pain was unavoidable, at least in the short run, in order to give Sachs’ “New Russian” entrepreneurs the freedom to remake the economy, thereby opening the way to greater prosperity for all. Let us turn now to the new entrepreneurs, the other great class of capitalism.

Sachs’ reforms gave the “New Russian” entrepreneurs their freedom, to be sure. But instead of investments rationalizing the economy along capitalist lines, Russia’s new bourgeoisie just plunged into a hellish free-for-all of “grabification”—a brutal struggle to steal everything they could get their hands on. They plundered the nation’s wealth of natural resources, sold state-owned gold, diamonds, oil, gas, Siberian forests, even plutonium, and unloaded them on the West to amass their private fortunes. And, as we’ve seen in the money-laundering scandals of late, they also privatized billions of dollars of western aid.

Instead of plowing their stolen wealth into productivity-enhancing investments, as Sachs’ reformers had hoped, they have, for the most part, just socked their loot away in secret western bank accounts or squandered it on yachts and villas on the French Riviera. By the mid-nineties, Russia’s red bourgeoisie had stashed more than 150 billion dollars in foreign bank accounts, investments, and properties. At home, they’ve “invested” in furs, limousines, and high living. And they’ve hired private armies of gun thugs to defend their stolen wealth and possessions (from each other). But this is only until, as the Thatcherite Economist frankly acknowledged, the “legitimacy” of these stolen properties can be ratified by compliant governments—as were the enclosures in England or the vast land grabs in the nineteenth-century United States.

In 1994, a U.S. Treasury official told journalist Seymour Hersh that U.S. shock therapists failed “to anticipate fully the viciousness and rapaciousness” of Russia’s new mafioso capitalists: “Much worse than the American robber barons. These guys take the fillings out of teeth after murder. It’s a nightmare.”3 Sachs explains these unhappy results by blaming the political culture of the old Communist regime. But this cannot be a sufficient explanation for the wholesale plunder brought on by the transition to capitalism throughout the post-Communist world. The main reason is that capitalism as a social system requires such a one-time wholesale expropriation of social property.

Why? Because capitalism requires capitalists, a class of people vested with an effective monopoly ownership of the means of production. But as Sachs himself points out, prior to 1989, Russia’s industries, mines, and natural resources “were nominally owned by the state and thus by nobody.” The nomenklatura collectively monopolized control of the means of production but they did not own them privately. The class had to be created. Sachs’ protocols for the transition contain no discussions of robber barons or gangster capitalists. Fetishizing an abstract ahistorical model, Sachs imagined that once prices were freed, once private enterprise was legally permitted, “capitalists” would somehow appear, stride forth, and take command of the economy. But where were these capitalists to come from? In 1990, no one in Eastern Europe or Russia had significant monetary wealth or private property in the industrial means of production. There was no bourgeoisie—not even a pre-revolutionary bourgeoisie to give the economy back to. As the joke went in Poland, “What were they to do—give the Lenin shipyard back to the Lenin family?” So no one had the means to buy the factories, the mines, the forests, the collective farms, or to hire labor. That’s why they all feared that western investors would just come in, buy up everything, and take over the whole economy.

So who were the capitalists, the “New Russian” entrepreneurs, supposed to be? Sachs was quick to rule out the workers: “[T]he overriding aim should be to transform state enterprises into private corporations, with transferable ownership shares, rather than, say, into cooperatives or firms self-managed by their workers.” Sachs also insisted that “[T]he government must…stop managers walking away with state property.”

If not the workers and not the managers, who would become the capitalists, the owners of the private corporations? How could the reformers go “all the way” to set up a “western-style” capitalism without capitalists? To set up the basis for “normal” capitalist accumulation, they needed to carry out “primitive accumulation”—capitalists had to be created. Individuals had to take possession, privatize property, factories, mines, wells, and forests. But since no one had the money to buy these state properties from the government, there was no feasible way this privatization could be done legally, legitimately, or morally. And given Sachs’ insistence on the need for speed in the transition, there was no time for a native capitalist class of small entrepreneurs to grow up over decades or centuries into large corporations. This class had to be hothoused, virtually overnight. And it was. In the end, a combination of elements of underground mafiosa, the nomenklatura, especially the top managers of certain industries, and segments of the intelligentsia —these people were essentially drafted to privatize the economy criminally. Indeed, Sachs and the HIID bear much responsibility for the creation of Russia’s criminal capitalists because they drafted many of the privatization decrees. Indeed, the U.S. government is now investigating whether, and to what extent, the HIID broke U.S. laws by funneling hundreds of millions of United States Agency for International Development (USAID) dollars into the hands of corrupt privatizers like Anatoly Chubais and his cronies, and to what extent Harvard academic advisors personally profited in the process.

In sum, a decade after the latest generation of Harvard’s “best and brightest” did Russia, the one-time superpower has been effectively demodernized. The economy is in ruins; the country is saddled with more than 150 billion dollars in debt; healthcare and social services have been gutted; 70 to 80 percent of the population survive at subsistence; a third of the country’s population is now living in extreme poverty, many on the verge of starvation; and a class of gangster capitalists has supplanted the Stalinist bureaucracy. And this is what U.S. economists call a “rational,” “normal” economy.4

The fundamental conditions of capitalist production have come into existence in Russia very quickly: on the one side are the mass of Russians who have lost all guarantees of existence afforded by the old Soviet arrangements; on the other side are owners of money, eager to increase their holdings. Nevertheless, today, the issue of private property is still bitterly contested and far from settled in Russia. Private property is still not fully legal and there is still no independent judiciary, no bourgeois state, to back it up. Russian public resistance to the legalization of this “grabification” of state-owned property remains strong. Yet without these guarantees, most Russian capitalists remain reluctant to sink money into productive investments at home. So there has been little productive investment, little development, and the economy continues to sink even as privatization and marketization advance.

China’s transition to capitalism has followed a sharply different course, but with a similar end result.5 On the one hand, China’s post-Communist ruling class is striving to fully expropriate the proletariat, to break their “iron rice bowls” (their guaranteed jobs, state-subsidized housing, free medical care) and to subject them to market discipline, breaking through socialist “sloth” and raising labor productivity (even, according to New York-based Human Rights in China, to the point of reproducing the workhouses of Dickens’ England). On the other hand, they’re striving to privatize the profits of, and eventually the ownership of, the country’s state-owned means of production. Many cadres are also “borrowing” state funds and “plunging into the sea of the market.” This struggle has been led by China’s highest-level cadres, starting with Deng Xiaoping and his children. Since the onset of reform in the early 1980s, these post-Communist robber barons have plunged into a veritable orgy of corruption, embezzlement, bribery, kickbacks, graft, smuggling, currency manipulation, influence peddling, and theft of state funds to amass personal fortunes and privatize state monies, enterprises, and properties. It was, of course, this “official corruption” that was the main grievance of protestors in the Tiananmen uprising in 1989. This resentment is, if anything, felt more deeply today.

China’s transition to capitalism has differed from the Russian case in two main ways: first, the Chinese, starting in 1978, broke up their communes and effectively privatized much of the agricultural sector (whereas in Russia, agricultural production is still carried out mainly by large-scale, state-owned, state-managed farms). Though still maintaining formal legal ownership of all agricultural land, the government instituted long-term leases that gave peasants some incentive to improve. Though still enforcing production quotas for major crops like grain, oil crops, and cotton, the government allowed peasant farmers freedom to organize production and to sell sideline produce on the free market. These reforms transformed China’s agricultural sector, generating regular and sustained increases in farm output that served to underpin the entire reform process.

Secondly, whereas the Russians rapidly (and criminally) privatized large sections of state industry right at the start of the reform process, the Chinese have, so far, maintained state ownership, management, and planning of the bulk of the industrial economy. Side-by-side with this state sector, however, the Chinese simultaneously promoted the development of a new private and semi-private economy, heavily foreign-funded and export-oriented. This economy is composed mainly of new rural township industries and “Special Economic Zones” established in the 1980s in Guangdong and other coastal provinces. In contrast to state industries, which still produce mainly for the plan, these new industries produce for market, and they have few to none of the restrictions or social obligations imposed on state industries. So the Chinese created, in essence, an economy within the economy. They were able to do this mainly because they were able to tap into the vast wealth of Hong Kong and other overseas Chinese to fund private and semi-private development. The Chinese leadership also invited western, especially U.S., investment, which began flowing heavily into the special economic zones in the mid-to-late 1980s. So, again in contrast to the Russian case, foreign investment has largely funded the breathtaking growth of China’s non-state sector industries in the eighties and nineties. In this way, in the first phase, at least, the transition to capitalism has not been as traumatic as the shock therapy model Sachs’ HIID and the International Monetary Fund (IMF) imposed on Russia. Yet by preserving state ownership of most of the industrial economy, the process of primitive accumulation in China has only been delayed.

Under Mao’s “classless communism” prior to 1978, China had no capitalists and no private property. Virtually all industry was government owned, as was all land. Workers were tied to their production units, but as part and parcel of their lack of freedom, they had a presumptive right to their jobs, and their children could likewise expect to be assigned work, and enjoyed rights to their housing, medical care, childcare, free schools, and numerous subsidies. This was the workers’ so-called “iron rice bowl.” Everyone wore the same blue suit and was more or less equally poor—but could feel economically secure. The Communist cadres enjoyed the fruits of the system but they owned nothing personally. When, in 1978, Deng abandoned Mao’s “socialism in poverty” and called on China’s masses to “get rich!” he was careful to bar Communist officials from going into business—it being unseemly at the time for actual card-carrying Communists to become practicing capitalists.

For years after launching the market reforms in 1978, the government sought to confine the developing market economy to farm sidelines, small-scale private manufacturing, and petty trading. These reforms were quite successful as far as they went. But rural, small-scale industry and farmers’ markets were not going to generate the capital to renovate China’s economy, and were not going to employ China’s growing population.

Reluctant to give up control of state industry, China’s Communists tried, in the 1980s, to reform state-owned urban industries by introducing some market reforms, such as pay hikes, bonus incentives, and two-tier pricing structures to encourage some out-of-plan production. But since they also continued to enforce mandatory production targets and state ownership of industry, the reforms had little effect. State industry stagnated, the national debt mounted as the government took on foreign loans, and, meanwhile, China’s surging population growth was putting enormous pressures on the government to generate new jobs and raise incomes. By the mid-1980s, therefore, Deng gave the Communist cadres the go-ahead to get into business in a big way. The cadres were freed to set up joint ventures with foreign capitalists and even private enterprises in order to generate jobs, foreign investment and tax revenue. Yet China’s cadres, like Russia’s, lacked the personal capital to set up private businesses, and they did not own the state enterprises they ran. So without a “legal” way to embourgeoisment, China’s red bourgeoisie began to build their fortunes through corruption. In the beginning, they enriched themselves by trading on their position, but they soon graduated to siphoning off state funds to set up private businesses. Rural cadres also levied numerous ad hoc levies on peasants.

In the ongoing collapse of China’s social order into a pell-mell capitalist free-for-all, it is no longer clear who owns what. As in Russia, the transition to a market economy in the absence of a bourgeois legal framework is fast producing a descent into corruption, criminality, gangster capitalism, and violence in a society-wide struggle over property. In the cities, managers are struggling to break workers’ job rights, and tens of thousands of industrial workers have been forced out of their state jobs and into the free market. Cadre capitalists strive to privatize “their” enterprises by means of stock frauds, back-door deals, bilking government treasuries, and outright theft. Factory bosses squeeze their workers, and government officials squeeze the capitalists. Government agencies, such as the army and schools, have gone into business. In the countryside, millions of Chinese peasants are being driven off their lands by economic necessity. The state refuses to pay them enough for their crops for the farmers to make a living wage, their land is ruined by overfarming or by drought (as precious water supplies are diverted to government and joint-venture industrial projects), or they’re ejected by local officials, who confiscate their lands for joint venture industrial projects, road building, or urban sprawl.6

In March 1998, the govenment announced its intention to begin privatizing its ailing state-sector industry by selling off thousands of small, state-owned industries. But in just a few months, the program collapsed in corruption, as Prime Minister Zhu Rongji conceded in his speech to the National People’s Congress in March 1999. Zhu was responding in part to the increasing public outrage at growing corruption. The threat of rising unemployment that privatization inevitably entails (and which China can ill afford) has forced China’s reformers to retrench. For the moment, large-scale privatization is on hold.

The end result of this process of primitive accumulation cannot be foreseen. But what is absolutely certain is that far from the fantasy of a smooth, gradual transition to capitalism envisioned by western academic economists, capitalism will be born through intense class struggle in all its manifestations. And instead of a vast consumer cornucopia for all, we can expect to see vast poverty and unrest as millions more lose their lands and jobs. There is already a “floating population” of more than a hundred million mostly landless and homeless migrants in China. But as evidenced by reports like those in the Asia Monitor Center’s Asian Labor Update, masses of people in China are not reacting passively to their forced transformation. Since the beginning of the decade, discontent over inflation, non-payment of back wages, layoffs, hazardous working conditions, and bureaucratic corruption has fed thousands of strikes, slowdowns, and protests against both state industries and foreign-owned firms. Peasant farmers have also protested over taxes, corruption, and expropriation of their lands. And despite ferocious state repression of labor activists, workers have repeatedly tried to form independent trade unions. China’s increasingly restless and combative labor force has yet to find its voice, but when it does, this could throw a large wrench into the World Bank-comprador bureaucrat plans for a transition to capitalism. The government’s reaction to the Falun Gong cult shows how desperately they fear independent organization.

Conclusion

Capitalism requires a class of capitalists and a class of proletarians. These classes do not come into existence naturally and spontaneously. As evidenced in the first transition to capitalism from feudalism, and as we can see from observing the rapid transformations in the former Soviet bloc countries within the last twenty years, the enrichment of some and the impoverishment of the many is inevitably a brutal and corrupt process. The wonder is not that the introduction of capitalism is responsible for these disasters, but that the illustrious western economic “experts” who were the architects of the transition expected anything else.

Notes

The Economist (January 13, 1990), p. 23; the following quotes from Sachs are also from this article.

Atlantic Monthly, June 1994, p. 79, also the source of the quote on page 2.

Some measure of the depth of despair among the victims of the transition to capitalism in Russsia is revealed in a recent poll on attitudes to reform. When asked, “What economic system would you prefer?” 48 percent of Russians polled said they would prefer “state planning and distribution,” while just 35 percent preferred “private property and the market.” To the statement “It would have been better if the country had stayed as it was before 1985,” 58 percent answered “yes;” only 27 percent said “no.” See the Economist, December 18, 1999, p. 21.

For a lengthier analysis, see Richard Smith, “The Chinese Road to Capitalism,” New Left Review (May-June 1993), pp. 55-99. The following description draws from that article.

The methods and extent of offical corruption have been widely reported in China and the West. One of the best sources is a widely read new book Zhongguo de xianjing [China’s Pitfall] (Hong Kong: Mingjing chubanshe, 1998), by newspaper reporter and former economist He Qinglian, which pushed the limits of official tolerance. Though not yet available in translation, see the review by Liu Binyan and Perry Link in the New York Review of Books (October 8, 1998).